The Postal Service Unrolls Its Five-Year Plan

The former Soviet Union was famous for five-year plans. Between 1928 and 1991, it announced thirteen of them. The plans were designed to increase economic production, achieve efficiencies through centralized planning, and redistribute the wealth along Marxist principles. Each was announced with great fanfare and fantastic posters designed by progressive artists employing the latest propaganda techniques. (The one at the left, done in 1930, says, “Fulfill the five-year plan not in five years, but in four.”)

The Postal Service has just released a Five-Year Plan of its own. Entitled “Plan to Profitability,” the new Business Plan is designed, like the Soviet plans, to take advantage of automation and improve efficiencies. It too will redistribute the wealth, though the money will not be flowing in a direction Marx would have approved of.

The new Business Plan is basically a version of what the Postal Service floated this past summer in a couple of white papers on “workforce optimization” and the retiree benefit plans. There may be a more thorough business plan sitting somewhere in postal headquarters, but the document released to the public is basically a Powerpoint presentation with a lot of groovy graphs and charts. It’s mostly PR, and the Postmaster General is doing the media circuit promoting the plan. It’s crunch time. The moratorium on closing post offices and plants ends on May 15, and Congress needs a kick in the butt or else the Postal Service will have to execute its endgame, whatever that is.

The Soviet plans were mostly disasters — they caused famine, failed to reach goals, and led to a deteriorated standard of living — and the last of the plans, unrolled in 1991, didn’t get past year one — the Soviet Union dissolved before it could be implemented.

We’ll have to see how things go with the Postal Service’s Five-Year Plan. The headlines have all focused on the fifty-cent postage for a First-Class stamp, but there’s a lot more in the plan worth noting, starting with who wrote it.

The Postal Service outsources its business plan

The Business Plan was produced with the help of Accenture and Boston Consulting Group, joined by the new member of the team, Evercore. The Postal Service has hired the first two several times in the past to make projections and prepare action plans. Their help does not come cheap. Accenture received $125 million in 2011 in business from the Postal Service (it’s #7 on the list of biggest suppliers).

Evercore is the investment banking firm founded by Roger Altman, the “ultraconnected” Wall Street and DC insider who’s made millions parlaying his connections and giving out high-priced advice, like helping with the restructuring of General Motors. The Postal Service hired Evercore a few months ago to provide the agency with advice on “restructuring.”

(Update: The USPS press release about the Business Plan says that it “reflects prior business model analysis from McKinsey & Company.” McKinsey is another of these global management consulting firms. According to Wikipedia, it has an interesting track record: Enron CEO Jeffrey Skilling is an alum of McKinsey, Swissair entered bankruptcy after following recommendations from McKinsey, AT&T was told by McKinsey in 1980 that cellphones would only be a “niche market,” and McKinsey has been named as a defendant in Hurricane Katrina litigation. McKinsey was hired by Japan and India when their postal systems considered privatization, and the company website says, “We support our clients as they position themselves to meet regulatory requirements and accompany them on the road to successful privatization.” More here and here.)

With consultants like these pitching in on the Business Plan, it’s not hard to guess what direction the Postal Service is heading.

USPS is the best

The plan begins with a slide boasting about how efficient the Postal Service is. It says the following:

U. S. Postal Service ranked the best postal service within the world’s top 20 largest economies

Delivers 200% more efficiently than the nearest Post

Delivers 500% more efficiently than Deutsche Post (#5 Post in the world)

The report on which these observations are based was conducted by Oxford Strategic Consulting (OSC). The report summary does not say much about what criteria OSC used to rank the world’s postal services, but as this table suggests, it seems to be mostly about efficiency — the more letters delivered per employee and the more citizens served per post office, the better.

By the way, if you’re wondering what that last column is all about, WEF Postal Service Efficiency refers to a study done by the World Economic Forum, which apparently ranks postal services based on a survey question: “Do you trust your country‘s postal system sufficiently to have a friend mail a small package worth US$100 to you? 1= not at all, 7= yes, trust the system entirely.” A curious measure of efficiency, to say the least.

The Postal Service mentions its number-one ranking in the OSC survey at the bottom of every USPS press release, but it’s a dubious distinction. Over 8,400 people per post office is the most of any of the G8 countries, and it may explain why the lines are so long at your post office. If the Postal Service closes 15,000 post offices as planned, that would be over 14,400 people per post office — putting the U.S. in the company of Mexico and South Africa.

Cutting the workforce by 155,000, as described elsewhere in the Business Plan, would increase the letters delivered per postal worker from 268,894 to 435,000. That would be three times its closest competitor, Australia, and it would put enormous pressures on the mail system and its workers.

Such measures could apparently improve “efficiency” even more, but it may also work against the Postal Service’s high ranking. As the director of the OSC study commented, “This time next year USPS may no longer be the world’s best postal service. Brazilian and Russian operators are already outperforming some European services, a trend we expect to continue as western governments cut back investments.”

“Unsustainable losses” caused by e-diversion

The next section in the Business Plan is about the “unsustainable losses” being experienced by the Postal Service. The slide says there are four main causes: (1) steadily declining volume, caused by e-diversion and “economic changes”; (2) price caps; (3) the universal service obligation; and (4) labor costs.

Concerning e-diversion, the presentation is adamant: “The economy is NOT the main cause of diversion.” To make this point, there’s a graph showing how first-class mail volumes have been plummeting while the nation’s GDP has been going up.

The graph is strange. First of all, no one is saying that the economy is the main cause of diversion to the Internet. The issue is, what’s the main cause of the drop in volumes and revenues? The Postal Service keeps saying it’s the Internet, whereas the evidence suggests it’s the recession.

The graph would have us believe that, were it not for electronic diversion, mail volumes would have kept pace with the rise of the GDP. That would have brought first-class mail volumes in 2011 to 200,000 pieces a year — twice what they were in 1997, when the volumes started to taper off. That’s a very creative way of making the drop in mail volumes look as bad as possible, but it’s easy to make things look bad when you’re comparing actual numbers with an unrealistic standard. (Actual numbers for first-class mail volumes are here.)

Another problem with the graph is that it represents the 2008-2009 recession as a mere dip in the GDP, hardly the kind of thing that could have driven mail volumes down so precipitously. Only the Internet, suggests the Business Plan, could have done that.

Perhaps it would be helpful to look at some others graphs to get a sense of the impact of the recession on the mail. Here are two charts showing total mail volumes and revenues over the past few years from a report prepared by the Congressional Research Service (CRS).

As the charts clearly show, the big dip occurs when the recession’s impact begins to be felt. (The recession started in December 2007, and really took a dive in spring 2008.) Compare those charts with this one on housing starts over the past decade.

All the charts show increases peaking in around 2006, and steep declines in 2008-2009. Some of them, like the travel spending, show improvement over the past year, and there are good signs in car sales too; housing continues to lag. Who knows where mail revenues will go?

In any case, according to the Postal Service’s reasoning, the drops in car sales, housing starts, and travel spending in 2008 were all due not to the recession but the Internet. Who knew?

Actually, the Postal Service knows that the recession has been the primary cause of the revenue declines because that’s what its lawyers have been arguing to the Postal Regulatory Commission in the case for an exigent rate increase. In that venue, the Postal Service says that somewhere between two-thirds and 97% of the revenue losses during 2008-2009, as well as a significant portion of the losses since then, were due to the recession.

The Business Plan does not even mention the word “recession.”

How to save $22 billion a year by 2016

In order to achieve $22 billion in annual savings, the Postal Service proposes a host of measures, as summarized in the following chart:

The presentation proceeds to discuss some of these categories in more detail, while others are left curiously unexplained. Let’s take them one by one.

RHB pre-funding: $5.8 billion

The Business Plan is clear about one thing. The pre-payments to the retiree health care plan (RHB fund) have got to stop. There’s hardly a corporation or government agency around that pre-funds retiree health care like the Postal Service.

The chart shows a savings of $5.6 to $5.8, but in the discussion of RHB pre-funding, the Business Plan says that savings would be $6.2. The extra half billion comes from another aspect of the plan. The Postal Service proposes that management assume complete control over the retiree health plan.

The justification for this proposal is that “current federal programs exceed private sector comparability standard in terms of cost and coverage” (p. 15). That’s a reference to a passage in the 1971 Postal Reorganization Act (PRA), Title 39, which says, “As an employer, the Postal Service shall achieve and maintain compensation for its officers and employees comparable to the rates and types of compensation paid in the private sector of the economy of the United States.”

Although the passage was probably intended to ensure that postal workers be paid adequately (their wages were terrible at the time), the Postal Service — as well as many industry stakeholders and privatization advocates — frequently cites this passage to argue that postal workers now earn too much and enjoy benefits that are too generous — and that this is basically a violation of Title 39.

The Postal Service uses the same passage, curiously enough, to justify the large compensation package of postal executives. In the 2011 Form 10-K Financial Statement, for example, the Postal Service says that given the “size and scope of operations, the comparability requirement in Title 39 would suggest that the Postal Service’s executive officer compensation and benefits should be on par with the compensation and benefits of the very largest private sector companies in the United States. Even in these challenging economic times, comparably sized companies typically provide their top executives with annual salaries well in excess of $1 million and total compensation and benefits valued at several million dollars. These compensation packages typically consist of annual and long-term performance incentives, including a combination of cash payments and stock options and a number of benefits and perquisites” (p. 48).

Anyway, back to the retiree health care plan. Taking over the RHB fund would give postal management the authority to raise costs for employees and decrease their benefits. That, says management, would bring the plan into compliance with the “comparability requirement” in Title 39. But there’s something else going on. It’s about the money in the fund.

There’s currently $44 billion in the RHB fund, just sitting in the U.S. Treasury earning interest payments. With control over the fund, postal management could bring in an investment firm to help invest the money in the stock market, where returns might be much better. That’s exactly what Alan Robinson suggests in his recent piece on the USPS Business Plan: “A similar benefit could come from investing the retiree health benefit assets in stocks and bonds that are commonly used in the private sector retiree health benefit funds.”

This is where Evercore comes in. As you may have guessed, the investment firm wasn’t hired to help make fancy charts or advise management on expanding the Flat Rate Box business. As its website says, Evercore offers “world-class investment management services,” and they “manage, invest or administer capital on behalf of a broad range of institutional investors, including corporate and public pension funds.”

Evercore would like nothing better than to help the Postal Service invest $44 billion in stocks and bonds. What would the fees on that come to?

Fortunately, this idea wasn’t implemented back in 2007, when the Postal Service made its first payment of $8.4 billion into the RHB fund. That would have been just in time for the stock market crash, and the fund could have lost a few billion just as it was getting started. The compound annual growth rate (CAGR, adjusted for inflation) of the past five years for the S & P 500 has been a minus 2.48%. The RHB’s $44 billion was surely doing better in the Treasury.

5-Day Delivery: $2.7 billion

The Business Plan says that eliminating Saturday delivery will save $2.7 billion a year by 2016. In its presentation for an Advisory Opinion on five-day delivery, the Postal Service said it would save $3.1 billion. Apparently, the Postal Service has downsized the estimate, perhaps because the PRC said (p. 42) it would save about $2.4 billion.

The Business Plan doesn’t elaborate on five-day delivery — no mention of how many jobs it will cost, no reference to the PRC Advisory Opinion raising questions about the plan and its impact on service standards. “Five-day delivery” is referenced in a few tables, with no discussion, and the word “Saturday” is not even mentioned once in the plan.

In terms of the workforce, a savings of $2.7 billion, figured at 80% of costs for labor, would mean about 27,000 jobs lost. The impact on the mail flow could be significant as well, since Saturday’s mail would be combined with Monday’s, and it would be hard to get it all delivered in one day, so it could back up the mail all week, especially combined with changes to the processing network.

The processing network: $4.1 billion

“Network: Sortation & Transportation” is shown to save $4.1 billion in 2016, but there’s no indication of where that number comes from. The USPS testimony for the PRC Advisory Opinion on Network Rationalization says consolidating 250 plants would save $2.6 billion and cause a loss of $0.5 billion in net revenues, for a total cost savings of $2.1 billion. The Business Plan doesn’t say what other network changes would bring in the additional $2 billion in savings.

The Business Plan does include a discussion of the reduced service standards that will be caused by the network rationalization plan, and it references the market survey done “with 18 focus groups and 37 in-depth interviews” (p. 16). The Plan says that this market research shows that customers will be able to adapt to the changes, that for some customers service standards will be better than current perception, and that e-diversion will continue regardless of service standards.

That market survey was conducted to determine how much business might be lost if the mail slowed down by a day or more. The research actually showed customers, big and small, were very worried about the impacts of the plan, particularly when combined with eliminating Saturday delivery, closings post offices, and raising rates.

But one shouldn’t pay too much attention to the market research. In interrogatories submitted for the PRC Advisory Opinion on network rationalization, USPS witness Gregory Whiteman was asked about that research, and it seems that there may be some market-research results the Postal Service has not yet made public. It’s likely this section of the five-year plan will need to be revised once Mr. Whiteman responds to these questions.

Wherever these cost-savings are coming from, $4 billion in savings, figured at 80% of costs for labor, would mean a workforce reduction of about 40,000 employees.

Retail: $2 billion

The Business Plan has very little to say about “retail,” perhaps because savings in the retail category come primarily from closing post offices, and that’s a hot-button issue the Plan would probably like to avoid. The phrase “post office” comes up only once in the entire plan — “Local Post Office cost reductions.” That sounds like they want to reduce operating costs at your local post office, not close it. There’s nothing in the Business Plan about closing post offices or about how many will be “reduced.”

The Business Plan says that cuts to retail will save $2 billion, but it provides no chart or table or discussion about how those savings might be realized. A table on p. 20 shows cost savings for retail as $0.6 in 2012, $1 billion in 2013, $1.4 billion in 2014, $1.8 billion in 2015, and $2 billion in 2016. That progression shows a significant year-to-year increase in cost savings. Presumably, this represents thousands of post office closures each year for the next five years. How many post offices are we talking about?

That’s not easy to say. The Postal Service has not calculated how much its retail network costs to operate because in a typical post office, retail is not easily decoupled from other functions. But a witness in the PRC’s Advisory Opinion for the RAOI estimated that retail costs about $5.8 billion at most, and he cited another estimate of $4.5 billion (Klingenberg testimony, p. 5-6).

Those estimates thus suggest that saving $2 billion would mean closing over a third, and probably half of the country’s 32,000 post offices. The Postmaster General himself has said on several occasions that he envisions closing 15,000 post offices and he used that number in testimony before Congress on Sept. 6, 2011, but there’s nothing about that in the Business Plan.

Saving that $2 billion might require more than closing half the country’s post offices. It might also mean reducing the number of window clerks at the post offices that remain open. That’s because closing a post office doesn’t save very much money. The Postal Service estimated cost savings for closing the 3,652 post offices on the RAOI at $200 million — $55,000 per post office. The PRC’s Advisory Opinion (p. 132) estimated a cost savings for 95% of the offices on the list at about $100 million — $30,000 per office. A George Mason study in 2008 found that closing 9,200 small rural post offices would save about $600 million — $65,000 per office. The Postal Service did a study of 28 stations and branches, and found closing them could save $1.7 million over the seven-month period it examined — annual cost savings, $100,000 per office.

With numbers like that, you would need to close nearly all 32,000 of the country’s post offices to save $2 billion. So the savings might break down something like this: Closing 12,000 small offices would save about 700 million, closing 3,000 stations and branches would save about $300 million, and the other $1 billion would come from reducing staff at the remaining 17,000 post offices. In his testimony before Congress on Sept. 6, the Postmaster General indicated something along those lines when he said closing 15,000 post offices would save $1.5 billion; presumably the other $500 million would come from staff reductions.

Overall, saving $2 billion on retail would have to mean a big reduction in the retail workforce. Figured at 80% of costs, that’s $1.6 billion, or about 20,000 postmasters, OIC’s, and clerks — about one in nine. (There’s a thorough overview of the postal workforce here.)

Talk about long lines at the post office. What will happen when half the post offices close, and the remaining post offices have fewer clerks? And what a mockery this makes of the Postal Service’s case for the RAOI and the thousands of discontinuance studies it has conducted, all pointing to a nearby post office where patrons of a closed post office can go instead — it’s likely that post office that won’t exist by 2016.

(Nothing about that in the Business Plan.)

Delivery: $3 billion

The Business Plan says it would save $3 billion in delivery costs, but there’s nothing about how. This is a separate category of savings from five-day delivery, so the savings must come from somewhere else. The item is included as an “operational initiative” not requiring legislative approval, so it can’t refer to reducing delivery to fewer than five days — another idea that the PMG has floated — because that would also require Congressional approval. (He said, in fact, that he envisions three-day-a-week delivery.)

Perhaps the Business Plan envisions reducing the workforce of letter carriers. There are currently about 250,000 rural and city carriers. In order to save $3 billion, the delivery workforce would need to be reduced by about 30,000 — about one in eight.

That’s in the ballpark of what the Postmaster General told Congress in September, when he said that he planned to cut 22,000 positions from the delivery system, which involved eliminated 22,000 city routes (out of 144,000). That would save $2 billion, he said. It’s not clear where the other $1 billion would come from.

Compensation, Benefits & Non-Personnel: $5 billion

The Plan calls for $5 billion savings in compensation and “non-personnel” costs, but doesn’t say anything about where that’s coming from. This is a separate category from five-day delivery, network consolidation, and closing post offices. Those savings categories already encompass savings in compensation, so the Business Plan must be referring to other cuts to the workforce and additional “non-personnel” savings. Those savings might include a reduction in the amount of outsourcing the Postal Service does.

Let’s assume that the outsourcing will be reduced by about 10%, from $12.3 billion to $11 billion. That will hurt the companies the Postal Service does business with, but hey, everyone has to share in the suffering. Maybe even FedEx will lose a portion of the $1.5 billion the Postal Service threw its way in 2011.

Subtracting $1.3 billion from the $5 billion savings in this category gives us $3.7 billion in savings from personnel cuts. Figuring 80% of costs for labor means another 37,000 jobs will be lost. Through what other initiatives — and with what impacts on service — these reductions will be made possible, the Business Plan doesn’t say.

Total savings and job losses

Just to review, then, how the workforce reductions would be accomplished:

Cost Saving Initiative

Savings in billions of $

Jobs Lost

Eliminate RHB pre-funding

$5.8

5-Day Delivery

$2.7

27,000

Network: Sortation & Transportation

$4.1

42,000

Retail

$2.0

20,000

Delivery

$3.0

30,000

Compensation, benefits, non-personnel

$5.0

37,000

TOTAL

$22.5

156,000

The Business Plan calls for a reduction in the Full-Time Employee (FTE) workforce of 155,000, so this breakdown puts us in the ballpark of how that would be accomplished.

The Business Plan has a chart (page 17) showing that in 2016, there will be 402,000 full-time employees, and a “career headcount” of 503,000. Presumably that means 402,000 career employees and 101,000 non-career employees. The chart, however, chooses not to illustrate this clearly and uses only one color for the bars.

The chart shows that in 2011, there were 557,000 career employees and 93,000 non-career. In 2016, the career employees would be reduced to 402,000 — a reduction of 155,000 — while the non-career workforce would actually increase from 93,000 to 101,000. That means basically that all of the positions that will be cut are full-time career jobs. The non-career positions would increase, from 14% to 20% of the total workforce.

As bad as all that sounds, it’s actually better than the plan announced a few months ago. In August, the Postal Service issued on white paper on “workforce optimization” that proposed a 2015 workforce of 425,000 — 300,000 career and 125,000 non-career. That plan would have meant a loss of nearly 260,000 career positions.

Postal workers need not worry. The Business Plan has a whole section on “Soft Landing” for Employees (p. 18), and the Postmaster General is going around telling everyone that all of the job cuts will take place through retirements.

New products and services

This section of the Business Plan lists some recent innovations, like Every Door Direct Mail, that the Postal Service has made recently. Most of these initiatives, aside from things like Flat Rate boxes, will be unfamiliar to average Americans. That’s because most of them are designed to improve service for the big bulk mailers.

The list is disappointing. The Postal Service seems uninterested in diversifying its products and services like they have in foreign postal systems, and there’s little on the list that would make regular consumers more inclined to do some business with the Postal Service. Even innovations like Flat Rate boxes aren’t as good as they might appear. The Flat Rate boxes often result in the customer paying more than traditional parcel post, and for many consumers, the best thing about the boxes is you can pick them up for free at the Post Office and use them at FedEx and UPS.

The curious thing about most of the innovations mentioned in the Business Plan is that they involve traditional mail rather than diversifying in new directions. One wonders why the Postal Service would want to put so much energy in regular mail, given its own projections about the inevitability of falling volumes.

Considering the risks

The Business Plan identifies several areas of risk, like the fact that half of the plan ($10 billion) requires legislative approval, many initiatives (like a rate increase) affect stakeholders negatively, employee attrition may be too slow, and so on.

There’s not much in the plan about how the proposed changes will impact revenues. It bases its revenue projections on predictions about customer behavior and mail volumes that appear to have been developed independently of the cost-cutting measures it’s proposing.

Granted, in its case to the PRC for eliminating Saturday delivery and consolidating plants, the Postal Service did sponsor market research to help predict how much business will be lost. As described to the PRC, those two plans could cause significant revenue losses. The five-day delivery plan could cause a gross revenue loss of about $1.5 billion and a net (contribution) loss of $0.6 billion. The plant consolidation plan could cause a revenue loss of $1.3 billion, and a net loss of $0.5 billion. (The net loss is lower because lower volumes mean lower costs.)

But these two plans account for only about $5 billion of the projected savings for 2016. That’s less than a third of the cost-saving measures being considered (not counting the changes to the retiree health plan). What impacts will the other $10 billion in savings have on revenue? How much will be lost if 15,000 post offices close, or if service standards are reduced even more than already planned?

The main risk of the plan is that downsizing the Postal Service in such drastic ways will degrade service so much that revenues will fall faster than the cuts can keep up with. Rather than maintaining approximately $62 billion in 2016 revenues (down from $66 billion in 2011), the Business Plan could drive down revenues much, much further.

The cumulative impacts of closing half the post offices and half the plants, cutting the career workforce by over a fourth, eliminating Saturday delivery, and everything else in the plan could have devastating effects on consumer confidence, mailing habits, and total revenues.

Rate increases

The Business Plan proposes raising a First-Class stamp to 50 cents. The plant consolidation plan and changes in service standards will slow down First-Class mail by a day or more. You’ll be paying more and getting less.

But the Business Plan has more to say about rate increases than the 50-cent stamp. The Plan calls for “targeted price increases” — an increase to fifty cents for a First-Class stamp but “careful changes” to standard (bulk) mail. It also notes that the “PRC must approve” the exigent rate increase. There’s a lot going on there.

First, the five-cent increase represents an 11% increase in First-Class postage. If such a rate increase were proposed across the board, the big mailers would go ballistic. Since 2010, they have been fighting a much smaller exigent rate increase of about 4%.

But the Business Plan is not proposing such an across-the-board increase. It wants to target first-class stamps, the postage used by average Americans. As the Plan notes, this would require legislative approval. That’s because the current rate system does not permit targeted increases like that.

Instead, the rate system ties postal rates for each category of mail to the cost of processing and delivering it. The Postal Service and the Postal Regulatory Commission regularly examine the numbers to identify what types of mail are “out of compliance” — i.e., they cost more to process and deliver than they bring in as revenue. Currently, many types of standard mail are out of compliance, and the Postal Service has been dragging its feet making the rate changes to bring them back into compliance because the rate increases would displease big mailers and possibly drive away business.

If Congress were to pass legislation decoupling rates from costs, the Postal Service could shape the postal system — even more than it already has — in ways that serve the big mailers. That, basically, is what’s behind the Business Plan. It does what the big industry stakeholders like the Direct Marketing Association have been advocating — cut costs and keep rates down, and don’t worry about postal workers or average Americans.

With a Business Plan like this, we’d all be better off if the Postal Service just kept on winging it.